Financial inclusion in Bangladesh and South Asia

In this blog post, Rashed Al Hasan, Policy Manager of the Business Finance for the Poor in Bangladesh (BFP-B) programme highlights the evolution of the financial inclusion landscape in Bangladesh as compared to other South Asian countries. He also highlights six strategic priority areas to be addressed by government to ensure access to financial services for citizens.

The World Bank’s Global Findex database 2017 surveyed adults in 140 countries to create indicators on access to and use of formal and informal financial services. With data on use of fintech, mobile phones, and the internet for financial transactions, it highlights gaps and opportunities that those countries face in bringing financial services to ‘unbanked’ populations.

For Bangladesh, the picture is complex, with both positives and negatives in terms of progress compared to other countries in South Asia. In Bangladesh, for instance, 21.2% of the population has mobile money accounts, which is higher than the average of South Asia (4.2%).

Meanwhile, the number of account holders aged 15+ move from 31% in 2014 to 50% in 2017, which represents good growth, though the number of account holders aged 15+ across South Asia stands at 70%. Bangladesh still has a long way to go in terms of basic access.

Source: The Global Findex Database 2017

“Sub-Saharan Africa may be the only region where more than 20 percent of adults have a mobile money account, but the technology has taken root in other parts of the world as well. In Bangladesh the share jumped from 3 percent to 21 percent” - World Bank Global Findex database 2017, page 21"

“The growth in account ownership since 2011 has not benefited all groups equally. Women still are less likely than men to have an account. Globally, 72 percent of men and 65 percent of women have an account, a gender gap of 7 percentage points. The gender gap is similar in developing economies, with 67 percent of men but only 59 percent of women having an account. Indeed, most developing economies have a gender gap in account ownership, though the size varies. In Bangladesh, Pakistan, and Turkey, for example, the gender gap is nearly 30 percentage points” - World Bank Global Findex database 2017, page 23"

Key highlights of Bangladesh from the Global Findex database 2017

Growth in mobile money. Globally, the spread of mobile money accounts is often considered in the context of sub-Saharan Africa and the spread of services like M-Pesa in Kenya. However, the share of adults with a mobile money account in Bangladesh, the Islamic Republic of Iran, Mongolia, and Paraguay has reached roughly 20% or higher.

Women still largely unbanked. Women are among the most unbanked segments of developing nations’ economies. In Bangladesh, the gender gap is particularly severe, with women representing 65% of the unbanked population.

On average, in developing economies, 43% of men have both internet access and a mobile phone, while 37% of women do. This indicates a gender gap of 6 percentage points. However, in India, Ethiopia, and Bangladesh, men are twice as likely as women to be able to access both.

National Financial Inclusion Strategy (NFIS) must warrant a coordinated approach to work between government policymakers and regulators to address the needs of people excluded from financial services.

Bangladesh and the upcoming National Financial Inclusion Strategy (NFIS)

Recognising the incredible potential of financial inclusion as a tool to alleviate poverty and create economic growth, Bangladesh is one of the 90 members of the global Alliance for Financial Inclusion. AFI is a knowledge exchange platform that helps members’ central banks to expand and improve financial inclusion policy.

Bangladesh is also a signatory of the Alliance for Financial Inclusion’s Maya Declaration, which assists member countries to set financial inclusion targets and to implement policy changes to reach those targets. A primary step in Bangladesh’s journey towards greater financial inclusion is the drafting of the country’s National Financial Inclusion Strategy (NFIS). The Business Finance for the Poor in Bangladesh (BFP-B) programme is collaborating with the Financial Institutions Division of Ministry of Finance and Bangladesh Bank, with support from the UK Department for International Development, to draft that strategy.

11 NFIS consultations organised by BFP-B and partners

To gather nationwide perspectives on greater financial inclusion, the BFP-B programme has organised 11 consultations across the country to meet government representatives, regulators, financial service providers, development partners, grassroots level people such as small entrepreneurs, farmers, women entrepreneurs, and other key stakeholders. A list of those consultations is below:

Consultation with high-level policymakers and regulators

Consultation with microfinance sector stakeholders (Partner: Credit and Development Forum)

The vision of the government of Bangladesh is to become a developed nation by 2041.

How can NFIS contribute to the government’s vision?

The Government of Bangladesh envisions to become a middle-income country by 2021, to achieve the Sustainable Development Goals (SDGs) by 2030, and to become a developed country by 2041. Greater access to financial services has both direct and indirect implication on SDGs such as those relating to poverty elimination, no hunger or food security, access to good health and ensure gender equality.

The key focus of NFIS is to ensure access to finance for all for growth and development. The NFIS envisions that people will have access to full range of quality financial services such as savings, credit, payments and insurance at affordable cost, ease of access, minimum risk and wider choices of selecting financial service providers.

Led by Dr. Mustafa K. Mujeri, the BFP-B team, through consultation with Financial Institutions Division of Ministry of Finance, Bangladesh Bank and other key stakeholders, has identified some areas where the NFIS can emphasize upon to ensure access to financial services to the people who are either unserved or underserved.

1. Consumer choice and convenience could be expanded with broader range of financial instruments

Consumer choice and convenience can be expanded by diversifying financial product development, fostering alternative delivery channels through partnership among Digital Financial Services (DFS) and agent banking, leveraging public infrastructure such as Union Digital Centre to expand the breadth coverage and facilitating a greater proportion of digital payment ecosystem. However, to expand consumer choice and convenience private sector needs support to develop customer-centric products and funds for high risk and experimental innovative financial products and services. More enabling regulatory environment is required for MFIs to mobilise deposits to expand microenterprise lending. And, the regulatory sandbox would promote fintechs and financial service providers to pilot innovative products and services. Moreover, data analytics capacity within the public sector is essential to track access and usage statistic

2. Transaction costs and time could be reduced through interoperability to connect financial service providers and the digital ecosystems

Currently there is no interoperability facility between banks and MFS providers. Interoperability policy and infrastructure could reduce transaction costs and time because it will promote partnership between banks, MNOs, MFIs, insurers, cooperatives and other stakeholders. The government is providing digital or smart National Identity (NID) card for all adults hence, e-KYC should be promoted. Enabling environment and building technical capacity across public and private sectors connectivity solutions such as using Application Program Interfaces (APIs) would be helpful for digital innovations and digital ecosystem development.

3. Create a financial infrastructure to reduce systematic risks

BFP-B is working with the Microcredit Regulatory Authority (MRA) to establish the country’s Microfinance Credit Information Bureau (MF-CIB), which will help microfinance institutions (MFIs) to gather essential information about potential borrowers in order to assess their credit worthiness. This initiative is very significant and will help to reduce systematic risk across the financial sector. However, the performance of credit bureau should be reviewed to track trends in the proportion of individuals and businesses registered under credit bureaus. It is argued that risks can be reduced through clearer policies and more supportive market infrastructure by identifying gaps in technological capacity within key stakeholders. Financial and technical support are necessary to enhance financial infrastructure.

Consumer protection could empower and protect customers to build their trust on financial service providers. The Smart Campaign, is a global effort that has been working towards client protection. More than 5,000 financial service providers globally have endorsed Smart Campaign Client Protection Principles. Many financial service providers specially MFIs of Bangladesh have endorsed Smart Campaign Client Protection Principles.

It is argued that consumer protection initiative is more effective if financial literacy rate is higher. However, the financial literacy in Bangladesh is low, with small businesses being unable to manage accounts or being unaware of the benefits of mobile money. Therefore, the finance sector needs initiatives that cater specifically to the needs of citizens who are not financially literate. This literacy creates empowerment of customers and consumer protection, which is essential to build trust among consumers of financial service providers. The financial literacy curriculum could be adopted in primary and/or secondary level education programme. The financial literacy will improve consumer decision-making as well as strengthen consumer protection. Moreover, financial literacy will encourage MSMEs to make greater use of financial management applications.

By considering the importance of financial literacy, the BFP-B Challenge Fund co-invested in the Hishab initiative which is a mobile-based voice recording service that assists small businesses with record keeping and credit management. Transaction records are created digitally based on voice recordings, which enables financial service providers to understand small businesses’ balance sheet, profitability, and ability to repay loans.

5. Leverage demographic dividend by prioritising youth and creating facilities for women to increase their access to financial services

According to Bangladesh Bureau of Statistics Labour Force Survey Report 2016-17, the total number of working age population (age 15+) of the country is approximately 109 million. Among them 63 million (59%) are employed. Among the total working population, around 22 million (20%) are youth labour force (15-29 years) and 20 million (19%) are women. These youth and women labour force significantly contribute to the economy of Bangladesh through employment as well as self-employment. Enabling regulatory environment is essential to improve access to basic financial services among youth, women and MSMEs. Credit target should be set for financial service providers (FSPs) to address demand for credit from each group. FSPs should increase investment in product development to expand provision within target groups. Moreover, institutional expertise could be leveraged to provide advice and technical support for programmes related to each target group.

6. More enabling core policies and regulations could accelerate the growth of depth and breadth of financial inclusion

Currently different government agencies, ministries, regulators and private sectors are implementing financial inclusion programmes on piecemeal basis. Coordination across different government agencies, ministries regulators and private sector is necessary to clarify roles and responsibilities of various actors. The Policy Component of BFP-B Project has established an 18-member Policy Advisory Committee chaired by the Senior Secretary, Financial Institutions Division of Ministry of Finance to coordinate and to share practical policy options relevant to financial inclusion among government agencies, ministries, regulators and private sectors.

The coordination among different key stakeholders will facilitate broad agreement on NFIS policy to mobilise resources and generate a broader support for financial inclusion. Conductive regulatory environment is necessary to foster competition and encourage the development of new products through a range of delivery channels. To promote innovation and fintechs, the scope for a regulatory sandbox should be assessed.

The growth of depth and breadth of financial inclusion can be accelerated by strengthening capacity for data-driven policy analysis, enhancing statistical capacity to collect financial inclusion statistics and, developing national database of MSMEs. Currently medium enterprises are unable to mobilise funds from the capital market because of lack of wider ranges of financial instruments such as Initial Public Offering (IPO), different terms of corporate bond and convertible bonds etc. Moreover, there is no facility of Special Purpose Vehicles (SPVs) or Credit Guarantee Scheme (CGS) for financing MSMEs in Bangladesh. The deepening of the capital market is necessary to introduce a wider range of financial instruments and long-term pooling options for investment. Access to finance of MSMEs can be increased by introducing SPVs and CGS.

Ways forward

It is expected that Bangladesh will transform from United Nations (UN) least developed country to developing country by 2024 and to a developed country by 2041. The government is also striving hard to achieve UN Sustainable Development Goals (SDGs) by 2030. The financial inclusion of the excluded people will ensure everyone’s participation in economic activities and which will ultimately contribute to the achievement of Bangladesh’s vision.